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Dow, S&P 500 end modestly higher on hopeful signs in fiscal impasse

Traders work on the floor of the New York Stock Exchange after the opening bell October 9, 2013. REUTERS/Adrees Latif

By Angela Moon

NEW YORK (Reuters) - The Dow and S&P 500 rose on Wednesday as Republicans and Democrats in Congress showed early signs of a possible break in the impasse, and U.S. President Barack Obama invited both sides for talks about ending the government shutdown, now in its ninth day.

Wall Street rebounded in the afternoon after the Nasdaq fell as much as 1 percent, with defensive sectors such as telecommunications and utilities rising on the day.

The Nasdaq, however, closed lower for a third day, pressured as investors sold this year's winning tech stocks including Netflix Inc (NFLX) and Fastenal Co (FAST).

"With the uncertainty over the government shutdown and the shaving away of the GDP each day, unfortunately, some investors will start selling these things that were good for the year rather than pulling off the laggards. And tech has been performing very highly," said Michael Matousek, head trader at U.S. Global Investors in San Antonio, Texas.

In the latest Washington developments, Republicans and Democrats floated the possibility of a short-term increase in the debt limit to allow time for broader negotiations on the budget.

At the same time, Obama began inviting lawmakers from both parties to the White House for meetings to discuss the government shutdown and raising the debt limit.

The slight shift in tone was aided by a column by House Budget Committee Chairman Paul Ryan of Wisconsin, who urged a negotiated end to the stalemate but did not mention Republican demands for linking changes in the federal healthcare law with government funding.

The market was also relieved that Obama nominated Federal Reserve Vice Chairwoman Janet Yellen to run the world's most influential central bank, providing some relief to markets that would expect her to tread carefully in winding down economic stimulus.

Yellen, an advocate for aggressive action to stimulate U.S. economic growth through low interest rates and large-scale bond purchases, would succeed Fed chairman Ben Bernanke, whose second term ends on January 31.

The CBOE Volatility Index (^VIX), a measure of investor anxiety, continued to rise, hitting 21.34, before retreating to 19.60. A level above 20 is generally associated with increasing concern about the near-term direction of the market.

A poll by Reuters showed Wall Street strategists expect the market to rebound toward the end of the year.

The S&P 500 (^GSPC) dropped 1.2 percent on Tuesday, its worst decline since August 27, sending the benchmark index to its lowest level since September 6 as traders cashed in gains in some of the year's highest performing tech stocks.

The Federal Reserve's shock decision last month not to reduce its support for the U.S. economy was a "relatively close call" for policymakers, according to minutes of the meeting that also suggested there was still broad support to trim bond-buying this year. Since last month's meeting, the outlook for scaling back bond purchases has grown cloudier.

"Between slow growth and the shutdown, it's clear we're in troubled times. I wouldn't expect any tapering for quarters from now," said Todd Schoenberger, managing partner at LandColt Capital in New York.

In company news, Darden Restaurants Inc (DRI) shares jumped 7.1 percent to $49.57 after the Wall Street Journal, reported hedge fund Barington Capital LP had taken a 2.8 percent stake in the owner of the Olive Garden and Red Lobster restaurants.

Shares of Hewlett-Packard Co (HPQ) rallied nearly 9 percent to $22.60 after Chief Executive Meg Whitman said she expects revenue to stabilize in 2014 with "pockets of growth" before the business accelerates again in 2015.

Yum! Brands Inc (YUM) fell 6.8 percent to $66.48 after the KFC parent warned it will take longer than expected for restaurant sales to rebound in China, which accounts for more than half the company's overall operating profit.

Volume was light, with about 5.9 billion shares changing hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, below the daily average so far this year of about 6.1 billion shares.